Can a supplier of luxury goods prohibit its authorized distributors from selling the products on a third-party Internet platform such as Amazon?
In the present day, online sales have grown considerably and Internet marketplaces such as Amazon work as one of the most important commercial channels.
In this regard, in the context of a selective distribution network for luxury goods, would contractual clauses prohibiting authorized distributors from selling those goods on branded third-party Internet platforms be compatible with the EU rules? The Court of Justice of the EU (CJEU) answered this question in the judgement Coty Germany / Parfümerie Akzente case on December 6, 2017 (C‑ 230/16, EU:C:2017:941).
I. Principle in the EU – Free trade
“Free circulation of goods” is a major principle of the European Union single market. Based on this principle, once goods are put on the market for the first time and with the consent of the trademark owner, then goods are free to circulate within the European Economic Area (EEA).
Under this principle, when products have been put on the market in the EEA by a brand owner or with his consent, the brand owner cannot use his trademark right to prevent the resale of the goods within the EEA. The registered trademark right is considered to be “exhausted” by the first marketing of the goods (so-called Community “exhaustion of rights”). From a competition law point of view, distributors must be free to sell their products and restrictions which are likely to restrict competition and harm consumers are prohibited.
However, there are some exceptions: in the context of exhaustion, EU law allows a brand owner to use his registered trademark right to oppose further dealings in the goods where there exists “legitimate reasons” for the owner to do so. EU law provides a non-exhaustive list of such reasons and case law has developed these further. Regarding such exceptions, a balancing of interests should be considered such as a balance between legitimate interests of the right holder, legitimate interests of purchasers/resellers and the general interest. “Luxury goods” are one of the goods categories for which case law has been asked to consider whether such exceptions would be allowed.
II. Background to the current case
Coty Germany sells luxury cosmetics in Germany. In order to support the luxury image of its brands, certain product brands are marketed via a selective distribution network, namely solely through authorized distributors. On the basis of a selective distribution contract, each of the distributor’s sales locations must meet certain requirements in terms of their environment, décor and furnishing. Coty's authorized distributors are allowed to offer and sell products online, but only through their own web shops and provided that the luxury character of the products is preserved. They are expressly prohibited from selling the products online via third-party platforms.
Parfümerie Akzente is one of the Coty’s authorized distributors and sold Coty’s products through the platform local Amazon platform in Germany amazon.de, in violation of the distribution contract. Coty Germany brought proceedings before a German court against Parfümerie Akzente, with a view to prohibiting it from distributing Coty’s products via the platform. With uncertainty as to whether the contractual arrangement between the both parties is lawful under the EU law, the Frankfurt Court of Appeal referred the case to the CJEU.
III. Judgement of the CJEU
With regard to the question whether selective distribution may be considered necessary in respect of luxury goods, referring to Dior / Copad case (C‑59/08, EU:C:2009:260), the CJEU recalled that the quality of luxury goods is not just the result of their material characteristics, but also of the allure and prestigious image. An “aura of luxury” is an essential aspect of the goods since it enables consumers to distinguish them from similar goods. Therefore, impairment to such aura of luxury is likely to affect the actual quality of those goods (para. 25).
The CJEU noted that having regard to their characteristics and their nature, luxury goods may require the implementation of a selective distribution system in order to preserve the quality of those goods and to ensure that they are used properly. Thus a selective distribution system designed primarily to preserve their luxury image complies with EU law, to the extent that retailers are chosen on the basis of objective qualitative criteria, uniformly applicable to all potential retailers in a non-discriminatory fashion and which do not go beyond what is necessary (paras. 24 and 29).
The CJEU also noted that the clause in question does not prohibit Internet sales in general, but only the use of third-party platforms such as Amazon. The court therefore concluded that prohibition of such sales is an appropriate measure to preserve the prestigious image of luxury cosmetics.
The court added that while the clause restricts a certain type of Internet sale, it does not amount to a general restriction on customers or on passive sales to end users within the meaning under the EU competition law (para. 68).
IV. Our Comments
Luxury brand owners clearly make an effort to preserve their luxury image and to appropriately maintain the reputation would be one of the legitimate interests of the brand owners. In this case, the court has considered that the characteristic and conditions of a selective distribution system may preserve such reputation. The court also considered the legitimate interests of purchasers/resellers and the general interest, and concluded that such selective distribution system would be allowed to the extent that retailers are chosen on the basis of objective qualitative criteria, uniformly applicable to all potential retailers in a non-discriminatory fashion and which do not go beyond what is necessary.
Whilst this judgment would be welcomed by the luxury goods industry, on the other hand, retailers/resellers will have to be cautious about contractual clauses with their supplier bearing in mind the ease of access to Internet market places.
Inserting clauses restraining sales on third parties marketplaces therefore appear to be legal to the extent that such clauses are uniformly applied to all authorized sellers and that the purpose of such restriction is justified, notably by preserving the image and the luxury environment affixed to a trademark.
Trademark owners willing to insert such clauses in their distribution contracts should nevertheless be cautious and consult their usual Attorney to verify that it conforms to EU regulation and case law.